Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World

Author/Editor: Elva Bova ; Nathalie Carcenac ; Martine Guerguil
Publication Date: July 10, 2014
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: This paper documents the spread of fiscal rules in the developing world and investigates the relation between fiscal rules and procyclical fiscal policy. We find that, since the early 2000s, developing countries outnumbered advanced economies as users of fiscal rules. Rules were adopted either as part of the toolkit to join currency unions or to strengthen fiscal frameworks during and after large stabilization and policy reform episodes. The paper also finds that the greater use of fiscal rules has not shielded these countries from procyclicality, since fiscal policy remains procyclical following the adoption of a fiscal rule. We find partial evidence that some features of “second generation” rules, such as the use of cyclically-adjusted targets, well-defined escape clauses, together with stronger legal and enforcement arrangements, may be associated with less procyclicality.
Series: Working Paper No. 14/122
Subject(s): Fiscal rules | Fiscal policy | Developing countries | Emerging markets | Business cycles

Publication Date: July 10, 2014
ISBN/ISSN: 9781498305525/1018-5941 Format: Paper
Stock No: WPIEA2014122 Pages: 27
US$18.00 (Academic Rate:
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